Safeway: No Impact From Inflation

ELLIOT ZWIEBACH

Pleasanton, Calif. — Safeway here said last week that the rate of inflation showed signs of moderating somewhat in its fiscal third quarter and is likely to continue to slow down in 2008.

Although Safeway absorbed a 2-cent hit on earnings per share due to inflation earlier in the year, the impact on third-quarter earnings was zero as the company passed through inflationary cost increases, Steve Burd, chairman, president and chief executive officer, told analysts during a conference call to discuss financial results.

Net income for the quarter, which ended Sept. 8, rose 13% to $194.6 million, with sales climbing 3.9% to $9.8 billion and comparable-store sales, excluding fuel, up 3.2%. For the 36-week period, net income rose 4.4% to $587.2 million, with sales up 4.5% to $28.9 billion.

“Inflation in the third quarter was essentially the same as in the second quarter, which was very high,” Burd said, “and we expect to see a fair amount of inflation in the fourth quarter.”

Safeway experienced “a three-week speed bump” early in the third quarter, “when we wondered if there was a shift in economic activity taking place,” he said, “but the last four weeks of the quarter were among the strongest weeks of the year, and by the early part of the fourth quarter things had normalized.

“We're seeing some prices moderate in produce, but inflation continues to be very high in dairy, with beef and chicken up, but less dramatically than in dairy.

“We absorbed a hit of 2 cents per share in the second quarter by not keeping pace, but during the third quarter we passed along the increases to consumers, so inflation was not a problem, and I doubt it will be a problem in the fourth quarter.

“The entire retail industry is keeping closer tabs on inflation than when it was at a lower level, but we're not getting into a hyperinflationary environment, and things should slow down next year.”

Burd said there is no clear evidence that retail price inflation is prompting consumers to trade down. “Though we're aware of the demand-dampening effect passing those costs through can have, it's hard to measure [the impact on consumers], because subtle changes in mix can be a result of promotions, but we're not seeing any particular trading down.”

Burd said he remains comfortable with the company's guidance on identical-store sales for the year — in the range of 3.6% to 3.8% — “because with the degree of uncertainty, and with inflation continuing, it wouldn't be prudent to try to forecast higher numbers.”